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Why McCain’s ‘Cap-and-Trade’ Won’t Work Nearly as Well as Obama’s

May 28, 2008

Robert Reich

With McCain now on board for a “cap-and-trade” system, it’s a certainty that we’ll have a president next year who wants to address global warming by imposing an overall cap on U.S. carbon emissions, which will drop annually. The “trade” part of the equation is that companies finding efficient ways to cut emissions can sell the unused portions of their permits to others.

But look more closely and you see a big difference between McCain and Obama (and HRC, for that matter)on how the permits are allocated. McCain’s proposal would give the lion’s share to companies that are now the biggest polluters. This does have some logic to it: after all, as the overall cap tightens each year, the biggest polluters face the largest challenges in cutting emissions.

By contrast, Senators Obama and Clinton have both proposed allocating permits through an auction. Under this system, every company – large or small – would have to buy rights to pollute. As a result, the biggest polluters would have to pay the most – thereby providing them with the greatest incentive to cut emissions right from the start. This makes more sense.

Remember, our atmosphere belongs to all of us. It seems only reasonable that polluters should have to pay to use it. The citizens of Alaska and Alberta, Canada get yearly dividends from the oil companies that take away their natural resources. Why shouldn’t the same principle apply when industries use the biggest common resource of all? The money they pay for permits could be returned as yearly dividends to every American family.

Of course, if polluters have to pay for the right to pollute, some of these costs might be passed on to consumers in the form of higher prices. But the yearly dividend checks would offset any price increases.

So next time you hear about cap-and-trade, ask the all-important question: How are the permits allocated? A carbon auction gets my bid.

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people. This entry originally appeared on his blog.

Copyright 2008 Robert B. Reich

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